A mere ‘show cause notice’

Written by Gyatri Tamilarasan and Trisha Shreyashi

Recently the Supreme Court of India in Delhi Vyapar Mahasangh Versus Flipkart Internet Pvt. Ltd. and Another & Amazon Seller Services Pvt. Ltd. has rendered an important decision. Upholding the order passed by the Competition Commission of India (CCI), the subsequent challenge to the single judge order and the Division Bench order of the Karnataka High Court, it concluded that a Section 26(1) order of investigation under the Competition Act, 2002 cannot be interfered with at the preliminary stage. This pronouncement stipulates a bar on interference and quashing of investigation before their commencement by the antitrust watchdog, CCI.

A Delhi-based union of small and medium enterprises involved in the business of mobile phones and related gadgets, called the Delhi Vyapar Mahasangh (DVM) informed the CCI that online marketplace platforms such as Flipkart and Amazon (online marketplace platforms) are adopting deep discounting methods on their platforms. DVM also alleged that the preferred sellers have affiliations with these online marketplace giants, and exclusive tie-ups with manufacturers to launch smartphones on the platform, precluding unfavored sellers to enter the market.

As such, DVM pleaded with CCI to take cognisance and investigate the online platforms under Section 3 of the 2002 Act. CCI in advertence to the submissions made by DVM and the information available on the public domain opined that a prima facie case exists, consequently directing the Director-General of Investigation to probe the matter — a power conferred upon CCI under Section 26(1) of the 2002 Act. It is imperative to understand that 26(1) order is merely a tentative view, and claims of informants/complainants shall not play out if evidence and the course of the investigation suggest a lack of substance in the allegations.

However, the online marketplace platforms challenged the CCI order as “untenable”. It was contended that the order merely relies on the submissions made by DVM and makes cursory remarks. At this instance, one might be reminded of a petition filed by the tech giant Google, challenging 26(1) the order in Google Inc. Ors. vs CCI (2015). The Court in the matter had opined that while forming the prima facie opinion, CCI need not hear the entity against whom the information has been made out. Once the investigation commences, it is inevitable that all parties involved shall be called to make their submissions and file evidence.

In light of the instant matter, the bench sought to examine the legality of the order. Relying on a Supreme Court pronouncement in CCI vs SAIL(2010), the bench observed that Section 26(1) order is a direction simpliciter, to cause an investigation. It is merely an administrative order akin to departmental proceedings, not involving any adjudicatory process whatsoever. One may thereby infer that 26(1) order neither amounts to civil consequences, nor does it instil any rights or liabilities.

Further, the Bench reiterated the apex court’s observations in Union of India Vs. Kunisetty Narayana (2006), while upholding the validity of 26(1) as being equivalent to a mere “show cause notice” thereby terming the pleas of interference as “premature”. It noted that arbitrariness and incompetency of the issuing authority could be the only grounds to challenge the validity of the order, which in the instant case is not the situation. It is pertinent to note that the Court observed that CCI does not delve into the merits of the case while directing investigation under 26(1), which has been affirmed by the judiciary on various other occasions.

The Court came down heavily on the e-commerce giants by questioning their pursuit in approaching the Court to crush the proceedings at the outset if they haven’t flouted the anti-trust norms. It is imperative to understand that such an order does not imply that guilt has been established. Commercial giants ought to realise that slowdowns, like that in Covid-19, disrupt the market dynamics and alter the outcomes for different participants, differently. Predatory practices due to their very nature are detrimental to unfavoured sellers, thus ex-post facto “anti-competitive” and anti-trust laws have emerged as instrumental in regulating healthy competition during the period of volatility. Contrary to objections made by those being investigated, such an enquiry shall rather clear the air against rumours. This ultimately benefits the smoother functioning of firms and the health of the market.

Tamilarasan is an associate at J&M Legal, Madras. Shreyashi is a legal draughtswoman, and a part of Harvard’s academia.